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FRA Notes Lecture 1

Financial reporting involves preparing financial statements to convey a company's performance to stakeholders, while financial statement analysis uses this data for economic decision-making. The document outlines the objectives of the International Organization of Securities Commissions (IOSCO) and details the importance of financial statement notes and segment disclosures in understanding a company's financial health. It also provides a framework for financial analysis and highlights the need for analysts to be aware of differences in reporting standards like U.S. GAAP and IFRS.
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0% found this document useful (0 votes)
4 views3 pages

FRA Notes Lecture 1

Financial reporting involves preparing financial statements to convey a company's performance to stakeholders, while financial statement analysis uses this data for economic decision-making. The document outlines the objectives of the International Organization of Securities Commissions (IOSCO) and details the importance of financial statement notes and segment disclosures in understanding a company's financial health. It also provides a framework for financial analysis and highlights the need for analysts to be aware of differences in reporting standards like U.S. GAAP and IFRS.
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Financial reporting refers to the way companies show their financial performance to investors, creditors,

and other interested parties by preparing and presenting financial statements.

The role of financial statement analysis is to use the information in a company’s financial statements,
along with other relevant information, to make economic decisions.

Most national authorities belong to the International Organization of Securities Commissions (IOSCO).

The IOSCO Objectives and Principles of Securities Regulation are based on three main objectives: 1.
Protecting investors 2. Ensuring markets are fair, efficient, and transparent 3. Reducing systemic risk

Proxy statements are issued to shareholders when there are matters that require a shareholder vote.
These statements, which are also filed with the SEC, are a good source of information about the election
of (and qualifications of) board members, compensation, management qualifications, and the issuance
of stock options.

Financial statement notes (footnotes) include disclosures that provide further details about the
information summarized in the financial statements.

They discuss the basis of presentation such as the fiscal period covered by the statements, whether IFRS
or U.S. GAAP is adhered to, and the inclusion of consolidated entities. They provide information about
accounting methods, assumptions, and estimates used by management. They provide additional
information on information included in the primary financial statements and items such as business
acquisitions or disposals, legal actions, employee benefit plans, contingencies and commitments,
significant customers, related party transactions, position and performance of segments of the firm, and
significant post balance sheet events. They are audited along with the primary financial statements.

Both U.S. GAAP and IFRS require companies to report segment data, but the required disclosure items
are only a subset of the required disclosures for the company as a whole. Nonetheless, an analyst can
prepare a more detailed analysis and forecast by examining the performance of business or geographic
segments separately. Segment profit margins, asset utilization (turnover), and return on assets can be
very useful in gaining a clear picture of a firm’s overall operations. For forecasting, growth rates of
segment revenues and profits can be used to estimate future sales and profits and to determine the
changes in company characteristics over time

A business segment (operating segment) is a portion of a larger company that accounts for more than
10% of the company’s revenues, assets, or income. An operating segment should be distinguishable
from the company’s other lines of business in terms of the risk and return characteristics of the
segment. Segments reported should account for a minimum of 75% of the firm’s external sales. The
following must be disclosed for each segment within the financial statement notes: Revenue (external
and between segments) A measure of profit or loss A measure of assets and liabilities Interest (revenue
and expense) Acquisitions of PP&E and intangibles Depreciation and amortization Other noncash
expenses Income tax expense Share of equity-accounted investments results.

The framework for financial analysis has six steps: 1. State the objective of the analysis. 2. Gather data.
3. Process the data. 4. Analyze and interpret the data. 5. Report the conclusions or recommendations. 6.
Update the analysis.
The role of financial reporting is to provide various users with useful information about a company’s
performance and financial position. The role of financial statement analysis is to use the data from
financial statements to support economic decisions.

Reporting standards are designed to ensure that different firms’ statements are comparable to one
another and to narrow the range of reasonable estimates on which financial statements are based.
These aids users of the financial statements who rely on them for information about the company’s
activities, profitability, and creditworthiness. An analyst needs to be aware of differences between IFRS
and U.S. GAAP when comparing companies in different jurisdictions. An analyst should be aware of
evolving financial reporting standards and new products and innovations that generate new types of
transactions.

Along with the annual financial statements, important information sources for an analyst include a
company’s quarterly and semiannual reports, proxy statements, press releases, and earnings guidance,
as well as information on the industry and peer companies from external sources.

1. Which of the following statements least accurately describes a role of financial statement analysis? A.
Use the information in financial statements to make economic decisions. B. Provide reasonable
assurance that the financial statements are free of material errors. C. Evaluate an entity’s financial
position and past performance to form opinions about its future ability to earn profits and generate cash
flow.

2. Information about accounting estimates, assumptions, and methods chosen for reporting is most
likely found in: A. the auditor’s opinion. B. financial statement notes. C. management discussion and
analysis.

3. If an auditor finds that a company’s financial statements have made a specific exception to applicable
accounting principles, she is most likely to issue a: A. dissenting opinion. B. cautionary note. C. qualified
opinion.

4. Information about elections of members to a company’s board of directors is most likely found in: A. a
10-Q filing. B. a proxy statement. C. footnotes to the financial statements.

5. Which of these steps is least likely to be a part of the financial statement analysis framework? A. State
the purpose and context of the analysis. B. Determine whether the company’s securities are suitable for
the client. C. Adjust the financial statement data and compare the company to its industry peers.

6. Which of the following is least likely to be a part of segment disclosure? A. Segment sales. B. Segment
cost of goods sold. C. Segment earnings.

7. Which of the following sources of information is most likely to be classified as a proprietary third-
party source? A. Research reports prepared by analysts. B. Trade journals. C. Statistics produced by
government agencies.

1. B This statement describes the role of an auditor, rather than the role of an analyst. The other
responses describe the role of financial statement analysis.

2. B Information about accounting methods and estimates is contained in the footnotes to the financial
statements.
3. C An auditor will issue a qualified opinion if the financial statements make any exceptions to
applicable accounting standards and will explain the effect of these exceptions in the auditor’s report.

4. B Proxy statements contain information related to matters that come before shareholders for a vote,
such as elections of board members.

5. B Determining the suitability of an investment for a client is not one of the six steps in the financial
statement analysis framework. The analyst would only perform this function if he also had an advisory
relationship with the client. Stating the objective and processing the data are two of the six steps in the
framework. The others are gathering the data, analyzing the data, updating the analysis, and reporting
the conclusions.

6. B Firms are not required to provide detailed financial statements for segments that would include line
items such as cost of goods sold, but the following should be disclosed in the segment data: Revenue
(external and between segments) A measure of profit or loss A measure of assets and liabilities Interest
(revenue and expense) Acquisitions of PP&E and intangibles Depreciation and amortization Other
noncash expenses Income tax expense Share of equity-accounted investments results.

7. A Research reports provided by analysts are rarely in the public domain. Trade journals and
government statistics are available publicly.

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